How is an employee ownership trust funded?

An employee ownership trust does not arrive with money. The employees do not contribute and the trust has no assets of its own on day one. So the question every owner asks second, after what is an EOT, is where the money to buy my shares actually comes from.

The short answer is your own business, out of profits it has not made yet. Understanding that properly is the difference between an EOT that works and one that stalls three years in.

The basic mechanism

The company makes contributions to the trust out of its post tax profits. The trust uses those contributions to pay you for the shares it bought. You are, in effect, being paid by the business you used to own, over a period of years.

Since 30 October 2024 there is a statutory income tax relief for contributions a company makes to the trust to fund the purchase price and certain associated costs, which removed a long standing area of uncertainty.

The three sources of money

1. Deferred consideration, the bulk of it

Most of the price is usually left outstanding as a debt the trust owes you. It is paid down as the company generates cash. Five to seven years is typical, though it is driven by trading rather than by the calendar.

This is not a loan in the ordinary sense. There is rarely security over the business, and you rank as an unsecured creditor. Interest is sometimes charged, often at a modest rate, and sometimes not at all.

2. Third party debt, for an initial payment

A bank or asset based lender may fund a payment on completion, giving you cash on day one rather than nothing. How much depends on the usual things: earnings, asset base, sector, and how comfortable a lender is with a business that has just lost its owner.

A word of caution. Debt taken on to pay you has to be serviced out of the same profits that pay the rest of your deferred consideration. Borrowing more at the start often means waiting longer for the balance.

3. Surplus cash already in the business

If the company is sitting on cash beyond what it needs to trade, that can form part of the completion payment. Worth being realistic about how much is genuinely surplus rather than working capital you never noticed you needed.

What a structure typically looks like

Illustrative only, using round numbers. Every deal differs.

Thirty per cent on completion and the rest over several years is a common shape. Some deals achieve more upfront, many achieve less.

Where the money comes from

The illustrative £5m structure above, shown as it actually arrives.

The affordability question, which comes first

Before anyone drafts a trust deed, the arithmetic has to work. Take annual post tax profit, subtract what the business genuinely needs for capital expenditure and growth, subtract debt service if there is new borrowing, and what remains is what can be paid to you each year.

Divide the deferred amount by that figure and you have the payment period. If the answer is fifteen years, the price is wrong, the structure is wrong, or an EOT is the wrong route.

This is why a realistic view of earnings matters so much. The adjusted EBITDA calculator will give you a defensible profit figure to start from, and the valuation calculator a range to test against it.

What happens if the business underperforms

Your payments slow or stop. There is usually no mechanism that compels a company without cash to pay, and you no longer control the decisions that generate it.

Things worth negotiating before completion rather than after:

• Security. Unusual, and a lender will resist ranking behind you, but worth asking
• Interest on the outstanding balance. Compensates for the wait and the risk
• Information rights. The right to see management accounts, so you know how your money is doing
• A board seat or observer right. Influence without control, which the rules now require you to give up
• What happens on a future sale. If the trust sells the company later, how your outstanding balance is treated

The risk that sits on top

Your money arrives over five to seven years. Your capital gains tax relief is exposed for four tax years after the year of disposal, following the changes that took effect on 30 October 2024. Those two facts overlap for most of the payment period.

So a disqualifying event in year three does not only create a tax bill. It creates one while a substantial part of your consideration is still unpaid, and by then the decisions that caused it were taken by people other than you. The detail is on the employee ownership trust page and belongs in a conversation with a tax adviser before you commit.

How we approach it

We model the affordability before anything else, because a structure that cannot be funded is not a deal. Then we work alongside a legal practice and an accountancy firm so the trust, the tax clearances and the funding are handled together rather than passed between three sets of advisers who have never spoken.